Why is the weak Japanese yen being supported by the US?

Following US intervention to support it, the value of the Japanese yen has increased by 35% versus the US dollar

Why is the United States of America involved?

The Japanese yen has lost 30% of its value against the US dollar and almost as much against the pound over the last five years. In relation to the US dollar, the currency recently reached a 40-year low. Now, influential people in the world of finance are drawing a boundary.

The US Treasury and Japan's Ministry of Finance confirmed over the weekend that they had worked together to support the yen by intervening in currency markets. According to reports, Japan sold £59 billion to purchase yen, and Washington supported this move with a smaller interventionits first in Japan since 2011.

The action caused the Japanese yen to rise 3.5 percent versus the US dollar, reversing months of depreciation in terms of foreign exchange. The effectiveness of Japan's own interventions had diminished. The potential firepower of America is significantly greater.

Why does the US purchase Japanese yen?

According to Katie Martin of the Financial Times, US Treasury Secretary Scott Bessent has demonstrated to markets that "a new sheriff in town" has arrived. Why Washington is intervening at all is the true mystery. Donald Trump's statement to reporters that "Japan's been very good to us, with the exception, of course, of Pearl Harbor" suggests that he simply enjoys Japan.

Bessent might also be driven by self-interest. At a time when government yields are already under pressure, Japan's "massive sales" of dollar assetsprimarily US Treasuriesare driving up US borrowing costs. "Stand behind Japan like a scary big brother" to "scare off the yen sellers" was his suggested remedy. This week, the Japanese yen strengthened from the 163 level before the intervention, stabilizing at about 157 to the dollar.

According to Brad Setser of the Council on Foreign Relations, the operation is likely to prevent a "disruptive further depreciation" of the yen, at least temporarily. Other Asian currencies typically experience lower pressure when the yen is weak. Weak Asian currencies hinder the White House's goal of US reindustrialization by lowering the cost of the region's exports. Speculators who are wagering against the Japanese yen may reconsider the trade if they receive a brief, severe shock.

Japan has been the target of excessive "negativity" in the market lately. The nation has a number of significant advantages, such as a sizable current account surplus and substantial overseas asset holdings.

Higher interest rates are the one missing component. Japanese interest rates are significantly lower than those in the United States at 1%, which leads to constant selling pressure as local investors look abroad for higher yields. According to Robin Brooks on Substack, that's where the problem is. Japan's enormous government debt, which accounts for 248 percent of its GDP, prevents it from raising interest rates. However, this currency intervention will ultimately "fail like all previous ones" in the absence of rate increases. The Japanese yen is likely still overpriced despite its decline. It is described as "a symptom of a debt crisis that's getting papered over."